Savings: An Analysis Of Savings Trend


Saving rate is one of the most important things that determine the investment and output in the economy. It is directly correlated with the investment in the economy, the higher the saving rate in the economy the higher would be the investment level in the economy.

Unfortunately Pakistan doesn’t come in the category of such countries which can claim high saving rate. Instead the saving rate in Pakistan is one of the lowest in the region, contributing very little to the national development and growth.


The saving rate in Pakistan has constantly been hovering from 9 to 13% during the last so many years. Pakistani society is consumption orientated and this is one of the reason why the Pakistanis save s o little.


Another big reason why Pakistanis save so small amount of their total income is that the high inflation rate over the years have made people to spend all the money that they make so as so to make the maximum from the current nominal value of money. The inflation in the economy sets in sort of expectations hypothesis mind set of the people and people expect high rate of inflation in future and thus want to spend what they earn as soon as possible. This has been a trend for the last decade, but it can be hoped that the saving rate may increase as an indirect consequence of the decrease in the inflation rate in the economy.  The inflation rate in the economy has 0been around 14 to 15 percent but this has come to single digit figure so it can be expected that there can be a positive impact on the saving rate in the future.


The gross nationals saving rate increased in 1993-94 by 31.3% to Rs.239 billion. The share of national savings in the GNP rose to 15.2% in 1993-94.  The increase in the national saving was a result of increased saving both on the part of public saving as well as the private saving. The other saving part of public sector registered a 15.1% increase while for the private sector both the household and the corporate sector showed an increase of 28.2% in the savings.


The gross national savings at current market prices grew by 13.0 percent to Rs. 278.2 billion during 1994-95 as compared to an increase of 35.3 percent during the year. The share of national savings in GNP declined from 15.7 percent in 1993-94 to 14.8 percent during 1994-95. There was a disserving in the public sector both because of the dissavings in the general government and also in the others section. Among the public sector household savings increased to Rs. 236 billion during the year 1994-95 as compared to the savings of Rs. 181.7 billion during the year 1993-94. The gross national savings at current market prices rose by 8.1% to Rs. 298.6 billion during 1995-96. The share of national savings in GNP fell from 14.6% in 1994-95 to 13.6% during 1995-96. The ratio of public saving s to national savings rose from 13.9% in 1994-95 to 18.2% in 1995-96.Within public sector the general government had dissavings, however the other saving of the government showed a increase of around 78.9 percent.  The private sector savings rose by around 3.2 percent to Rs.244.4 billion during 1995-96 as compared to an increase of around 15 percent the previous year.  Within the private sector the household as well as the corporate sector recorded an equal increase of around 3.2% during the year as compared to previous year when the increase in the savings was 15 percent.


The gross national savings rose by 7.5percent to Rs.320.9 billion. The share of national savings fell from 13.6percent to 11.3percent of the GNP.  The public saving registered a still sharp increase to 47.5 percent as compared to an increase of 42 percent the previous year. The private saving increased by 1.8 percent as compared to 3.2 percent the previous year.


The national savings increased at the current price level by 49.5 percent to Rs.401 billion during 1997-98 as compared with the increase of 7.5 percent the previous year. The ratio of national savings to GNP rose to 14.6percent in 1997-98 as compared with an increase of 11.3 percent the previous year and an average of 13.2 percent in the last five years. The public savings declined by 42.1 percent to Rs. 26.7 billion during 1997-98 as compared to an increase of 47.5 percent the previous year. The decrease in the public saving was result of both a decline in general government saving as well as the decrease in other savings.  The private savings increased sharply during the same period and registered an increase of 68.4 percent to Rs. 374.7 billion during 1997-98 as compared to an increase of 1.8 percent the last year and an average rise of 8.1 percent during the last five years.


Years 92-93 93-94 94-95 95-96 96-97 97-98
PUBLIC 21054 38881 35441 31282 46138 26735
PRIVATE 160950 207324 234431 218560 222417 374651
TOTAL 182004 246205 269872 249842 268555 401386




Banks play a key role in the regeneration of economic activities in a country. In addition to making short term self-liquidating loans to finance business, agriculture and industry, they also perform the vital task of resource mobilization by creating deposits.


The key to success for commercial banks is deposits and this is where they face real competition. Industrial growth has slowed and the wheels of the industry will not start moving till a much later date. The deposit base is no doubt expected to grow, but banks will probably not be able to maintain last years’ growth.


With the debt retirement schemes, new prize bonds schemes and the attractive returns being offered by them, banks find deposit mobilization that much harder.


The savings rate in the country at about 15% remains one of the lowest compared to other emerging economies like India (22%), Thailand (30%) and Indonesia (40%). For a stable deposit base, which is imperative for the smooth functioning of the financial sector to extend affordable credit to different sectors of the economy, the country must have a satisfactory savings rate.


At the same time deposits are becoming increasingly expensive and lending rates, with or without a cap on them cannot be raised by banks beyond a certain limit. Blue chip clients, who constitute the major portion of most of the banks’ borrowers, do not pay beyond a certain level of interest and hence banks are facing a tight squeeze.

The average cost of deposits for a bank in Pakistan is 8 to 10 percent; prime lending rates vary from 13 to 14 percent therefore giving banks very little room to play in. The rate of returns on government securities is fairly attractive, where all scheduled commercial banks are required by Prudential regulations to keep 20 percent of their time and demand liabilities.


The low saving rates combined with high deposit cost and reserve requirements have made the job of deposit creation really difficult for the banks. A more detailed and year by year analysis is presented in the forthcoming lines.


The growth of scheduled banks ‘deposits continued during 1993-94 though with some deceleration. Total deposits witnessed an increase of Rs.92.1bn or 19.5%during the year 1993-94.compared with the increase of RS.79.5bn or Rs.20.2%last year. The increase was largely accounted for by the time deposits which went up by Rs.53bn or 21.4% s compared with the rise of Rs.45.7bn or 22.6% 1n 1992-93. Demand deposits also recorded substantial increase of Rs.39.1bn or 17.4%compared with the rise of Rs.33.8bnor 17.7% in the preceding year. The ratio of time deposits to total deposits which had increased from 51.3%at end-June, 1992 to 52.4% at end of June, 1993 improved further to 53.2%at end-June, 1994 indicating gradually strengthening of intermediation process in the banking system.


Provisional quarterly data for six months ended December, 1993 in indicated that schedule banks’ deposits increase by Rs.48bnor 9.8%during this period as compared with the rise of Rs.49.7bn or 11.9% in the corresponding period last year. This increase in deposits was in line with the trend established since the introduction of the financial sector reforms. Annual increase in the scheduled banks’ deposits averaged around 19.6%during 1989/90-92/93 compared with the little over 14% during the preceding five years (1984/85-89) indicating reversal of disintermediation process witnessed in the pre-reform years.


The saving deposits’ accounted for the highest increase of Rs.22.2bnor 10.6%as compared with a larger rise of about Rs.32bn or18.5%in the same period of the preceding year. Their share in the incremental deposits, however, declined from64.3% in July –December 1993. Fixed deposits recorded a rise of Rs.17.9bn or 11.7%as compared with a small increase of Rs.10bn or 7.3%in the corresponding period last year their share in incremental deposits, however, increased from 20.1% in July-December, 1992 to 37.4%in July-December, 1993. Current Deposits also depicted an increase of Rs.10.2bn or 9.9% as compared with a smaller rise of Rs.4bn or 4.5%in the same period a year earlier. Within Fixed Deposits, the increase was mainly accounted for by deposits of less than six months and those of five years and above-each recording an increase of Rs.4.5bn. The respective percentage increases were 7.1% and 16.8%. In the preceding years deposits of less than six months’ maturity had risen by Rs.5.5bn or 9.8% and deposits with a maturity period if five years and above rose by Rs.4.4bn or 22.9%. At these levels, deposits of less than six months accounted for only 9.5%of incremental deposits during July –December, 1993 compared with a higher share of 11.1%during July-December, 1992. However, share of the deposits of Five years and above maturity improved slightly from 9%in July-December, 1992 to 9.4% in July-December, 1993.


Time series data by types of deposits further indicated that share of current deposits, call deposits, saving deposits with checking facility and fixed deposits of less than six months maturity with averaged around 83% of incremental deposits during1984/85-19988/89(on end-June basis) and was a high as 88%in June, 1985 came down to 79.2%in December, 1993. It indicated that although liquidity and hence use of these deposits for transaction purposes remain primary consideration with holders of bank deposits, return consideration of keeping deposits with banks started gaining grounds since the introduction of financial sector reforms. Indirectly, it also indicated the reversal of financial disintermediationin banks witnessed in most part of the 1980s. This happened despite the fact that on average rates offered by banks on the deposits of the maturities of one year and above were still lower both in nominal and real terms than those offered by competing sectors including Government and non-Bank Financial Institutions (NBFIs) for similar deposits. Rates offered by all categories of banks, namely, Nationalized Commercial banks (NCBs), Foreign Banks and new private Banks have, improved considerably during last four or five years. The induction of new private Banks and the privatization of the two NCBs also helped improve quality of competition for fresh deposit mobilization by offering better returns and better payments facilities. Replacement of credit ceiling with Credit Deposit Ratio (CDR), open auctioning of public debt and permissions to residents to open foreign currency accounts as well as the enlargement of the scope of non-residents with respect to acceptance of such deposits also provided additional fillip to banks’ efforts at deposit mobilization.


Distribution of deposits by holders showed that the increase during July-December, 1993 was mainly accounted by domestic constituents which rose by Rs.46.4bn or 11.9% as compared to an increase of Rs.44.6bn or 13.5%in the same period of the preceding year. Deposits of foreign constituents denoted an increase of Rs.1.6bn or 1.6%as compared with the relative larger rise of Rs.5.2bn or 5.9%in the corresponding period last year. Time series data on deposits by holders indicated that share of foreign constituents in total incremental deposits which averaged about 27% during 1984/85-1988/89 and reached a peak of 39%1991-92 declined sharply to 16% in 1992-93. This decline in their share continued through July-December, 1993 when it reached the lowest of 3.3% of incremental deposits as against 10.4%in the corresponding period of 1992. While the peak in share reached in 1991-92 may be attributable to the permission granted to non-resident banks to accept foreign currency deposits of a minimum amount of US Dollar 10m(or equivalent in other currency) from their overseas branches including financial institutions owned by them under swap arrangements with the state bank of Pakistan, the subsequent decline appears to be the result of simultaneous permission to residents to maintain foreign currency accounts while now form nearly 50% of all foreign currency deposits  and also form part of  domestic liabilities of the banking system. This permission rendered non-resident FCAs comparatively less attractive in the market as far as the profitable use of foreign currency deposits are concerned.


The growth of scheduled banks’ deposits (including deposits of domestic and foreign constituents but excluding inter-bank deposits) decelerated during 19904-95. Total deposits registered a RISE OF rs.95.4bn or 16.6% during 1994-95, compared with an increase of Rs.102.5bn or 21.7%recorded in 1993-94.

Time deposits rose by Rs.51bnor 16.6% compared with an increase of Rs.60.3bn or 24.3%in 1993-94. Demand deposits increased by Rs.44.4bn or 16.6%compared with Rs.42.2bn or 18.7% in 1993-94. The ratio of time deposits to total deposits, which had increased from52.4% at the end June, 1993 to 53.5%at end June, 1994 remained at the same level at end June, 1995.


With in overall deposits, profits and loss sharing (PLS) deposits with banks recorded a rise of Rs.98.8bn or 31.3%during 1994-95 as compared with the rise of Rs.41.4bn or 51.1%in !(93-94. The break up of the PLS deposits indicated that the demand deposits rose by Rs.38.8bn or 28.9% during a year  compared to the rise  of Rs 22.7bn or 20.3% last year. PLS time deposits rose by Rs.60bn or 33.1%compared to Rs.18.7bn or 11.5% in the preceding year. The outstanding level of total deposits under PLS system amounted to Rs.414.6bn as at end June, 1995(demand deposits Rs.173.2bn and time deposits RS. 241.4bn), constituting 61.8%of total deposits as compared with 54.9%at end June, 1994.


Total deposits recorded a rise of  Rs.117.7bn or 18.2%as compared with a rise of Rs.108.8bn or 20.2% in the preceding year . A break down by the type  showed that the rise was mainly concentrated in fixed and saving deposits  accounting for respective increase of Rs.51.6bn or 24.2% and Rs.38.4bn or 14.1%. Current deposits also recorded an increase if Rs.18.8bn or14.2% as compared with somewhat larger increase of Rs.19.2bn or 17% in the preceding year. The shares of saving and current deposits in the total increases, however declined from 36.7% in 1994 to 43.8%in 1995. With In fixed deposits the largest increase of Rs.28.4bn was witnessed in the category of deposits of less then six months ‘ whose share in total growth increased from 11.3%in 1994 to 24.2%in 1995. Deposits for six months and over but less than one year and for five years and over recorded substantial increases of Rs.10.4bnand Rs.9.1bn respectively. Their respective shares in the overall increase by three percentage points to 8.8% and 7.7%. The marked tendency to keep deposits in the shorter maturities reflected depositers’ preferences for short-term deposits  to guard against inflation , which eroded their deposits in the categories of longer maturities.


Analysis of deposits by  holders revealed that the share of foreign constituents in total growth, which declined from 32.6% in 1991 to 5.2% in 1994, increased sharply to 28.6%in 1995. On the other hand, the share of domestic constituents, which has increased to94.8% in 1994 from 67.4% in 1991, declined to 71.4%in 1995. Rise in the share of foreign constituents is due to mobilization of non-resident foreign currency deposits by banks. With in domestic  constituents Personal deposits accounted for the largest  increase  of Rs.53.9bn in 1995 as compared with smaller rise of Rs.26.7bn in 1994. Consequently, their share in total growth went up from 24.5% in 1994 to 45.8%in 1995. Increase in deposits of private Sector(business) amounted to Rs.33.6bn in 1995, compared with a larger  rise of Rs.52.1bn in the preceding year. Their share in total growth thus came down from 47.9%in 1994 to 28.5%in 1995. On the other hand Government deposits  recorded a fall of Rs.6bn in 1995 in contrast to a rise of Rs.21.2bn in 1994.


The types of deposits mainly held by common man are declining where those held by rich and business class are increasing. It is observed that the shares of current accounts, private sector(business) deposits and deposits amounting to Rs,100,000 and above in the growth of total deposits as compared to other categories of deposits.


Years 92-93 93-94 94-95 95-96 96-97 97-98
Deposits 79544 92074 108797 117685 121900 109400



Years 92-93 93-94 94-95 95-96 96-97 97-98
Time Deposits 45715 52994 81897 90005 108300 43500
Demand Deposits 33829 39080 26900 27681 13600 66000
Total Deposits 79544 92074 108797 117686 121900 109500





We feel that deposits will continue to show the strong growth in the future, rising on the back of higher savings. We expect both corporate and personal savings to respond positively to the newly announced tax and tariff reforms package. Privatization of the public sector corporations is also expected to contain dissavings by these corporations. Competition among banks for funds has led to across-the-border increase in deposit rates. With inflation running in double digits, depositors have been getting negative real rate of return on deposits. The situation is now changing and the banks are bidding up deposit rates to attract more funds. Higher returns on the other saving instruments like the national saving certificates and certificate of investment issued by leasing and modarba companies has further intensifies the competition for funds. Depositors are likely to emerge as major beneficiaries of competition among banks and other financial institutions as the return on deposits rises, yielding the positive rate of return on deposits.


The deposits of the scheduled banks have increased at a CAGR of 21.59% over the last five years (1991-96). Deposits in the Pakistani banks have grown much in line with the overall growth rate, increase in CAGR of 21.46% during the same period. Deposits of foreign banks rose at a CAGR of 22.1% , marginally higher than the industry average.

Analyzing the composition of the deposits, we see the share of demand deposits to total deposits has gradually decreased from 49.8%in 1991 to44.2% in 1996. Time deposits have shown a steady increase, rising from 50.2% of total deposits in 1991 to 55.8% in 1996. Demand deposits increased at a CAGR of 18.71% compared to 24.19% for time deposits during 1991-96.






Foreign exchange reforms introduced in 1991 allowed residents as well as non-resident Pakistanis to maintain foreign currency accounts. There has consequently been a marked shift in deposit mixed away from Pak rupee –denominated deposits to dollar based deposits  largely to hedge against persistent rupee devaluation. The SBP has encouraged the inflow of foreign currency funds by offering attractive rates on FCAs and providing deposit holders subsidized cover rates. FCAs have risen from US Dollar 3.69bn in 1991-92 to the present US Dollars 9.8bn , a CAGR of 21% compared to M2 ex FCAs growth of –0.2% (in US Dollar terms) over the same period.



FCAs currently total US $9.8bn and are split 56:44 between resident and non-residents holders. Of the resident portion , it is estimated that more than 70% of these FCAs are matched by local currency liabilities and, as such, are considered part of the domestic money supply. The non-resident portion , however , represents essentially a foreign currency liability. With liquid foreign currency assets of only USDollar1.5bn, there is a moral hazard risk of a run for dollars in the event of political or economic crisis. Such a run for dollars has historically been a major factor responsible for the dismissal of the government 1993 and again in 1996. Although we feel that the likelihood of such  crises emerging are remote, steps are being taken to reduce Pakistan’s vulnerability  to the sentiments of the FCA holders. The SBP has begun to push up the forward cover fees on FCAs toward market rates and has allowed foreign investors to book forward cover on the principal amount of their investments and currency risk perception will also help in the transition.


The sense of calm following the release of the Policy Framework Paper(PFP) has been shaken by the uneasiness that has developed between the Government of Pakistan and the International Financial Institutions. Other than the stern warning given by the State bank to resolve the IPP issue, persistent slippage’s in the tax collection and the government’s attempt to put forward a more growth oriented budget (in view of the austerity imposed by the PFP), are likely to be the issues of contention.


The issue remains that what will happen to the converted FCAs. The likelihood is that the bulk will be converted in to hard currency to retain the devaluation hedge. Although a certain component is likely to leave the country, the rest is going to be deposited in the banking system in the F.E.25 scheme. Banks who lose the liquidity (because of the conversion) will want to lose the new inflows of hard currency to generate Rupee funding


Since this will not be made available from SBP, the Central bank must create special guidelines to ensure that banks are able to swap this hard currency for rupees in the inter-bank market. If this is not done then banks will have no choice but to place the funds abroad, which will effectively reduce the level of financial intermediation in Pakistan’s banking system.





Investment is the key indicator of the financial and economic health of a nation, and it determines the capability of a country to grow, increase the future output and living standard of its citizen, because employment depends on effective demand and there are two constituents of effective demand-consumption and investment. Of the two investment is more volatile as well as more strategic variable. A fundamental principle is that as the income of a community increases, consumption level will also increase but by less than the increase in income. Hence, in order to have sufficient demand to sustain an increase in the employment, there must be increase in real investment. Being a more volatile variable, investment determines the effective demand and future well being of the economy as well as its citizens. Especially the foreign investment plays a key role in the development of a developing economy like Pakistan because every economy is endowed with limited factors of production, land, labor, capital and enterpreneurship. The foreign investment not only helps in adding to them, but also helps in utilizing the available resources more productively. Unlike domestic investors foreign investors have more choices and therefore, are more stringent in their risk/return analysis. They ensure that the use of resources is more optimal, reducing wastage. The added advantage of foreign investment is that it helps in financing the current account deficit and builds up forex reserves and the more efficient operations also make the country’s exports more competitive.


A more detailed and year wise analysis of the investment is presented in the coming lines.



The gross total investment increased by 12.3 percent during 1993-94 compared to an increase of 13.8 % in the preceding year. Gross fixed investment went up by 11.9% to Rs. 287.3bn during 1993-94 as compared with 13.9% last year. The ratios of the gross total investment and gross fixed investment to GNP at market prices declined from 20.5 % and 18.9% in 1992-93 to 19.9% and 18.3% respectively in 1993-94.

A sectoral break up of gross fixed investment, at current prices, indicates that the private sector fixed investment increased by 13.1% to Rs. 152.5bn during 1993-94 as compared to an increase of 13.4% in the preceding year. Public sector fixed investment during 1993-94 increased at a slower rate of 10.6% to reach Rs.134.8bn compared with 14.5% increase recorded in 1992-93. The sector-wise analysis of gross fixed investment by economic activity showed that the shares of agriculture, mining and Quarrying, manufacturing, construction, and electricity and gas increased from 8%, 1.3%, 24.7%, 3.9%, and 13.1%, in 1992-93 to 8.2%, 1.9%, 25.4%, 4.2% and 13.9% respectively in 1993-94. The shares of transport and communication, Financial Institutions and General Government, however, declined from 13.6%, 11.4% and 18.9% in 1992-93 to13.1, 11.1% and 17% respectively during 1993-94.


The share of private sector investment in total gross fixed investment increased from 52.5%in 1992-93 to 53.1% in 1993-94 while that of public sector declined correspondingly. Private sector fixed investment (at current prices) showed a growth rate of 13.1% during 1993-94, marginally lower than 13.4% recorded a year earlier. The ratio of private fixed investment to GDP marginally declined from 10% in 1992-93 to 9.8 during 1993-94.


The growth rate of fixed investment in public sector decelerated from 14.5% in 1992-93 to 10.6% during 1993-94. The slow growth in public sector fixed investment in areas such as manufacturing, Transport and communication, financial Institutions and General Government. The ratio of public sector fixed investment to GDP declined from 9.1% in 1992-93 to 8.7% during 1993-94.


The gross fixed investment at current prices increased by 17% to Rs.328.7bnduring 1994-95 compared with an increase of 9.4% I the preceding year. The ratio of gross fixed investment to GNP at market prices, however, declined from 17.9%in 1993-94 to 17.5%in 1994-95.


Private fixed investment at current prices rose by 15.5% to Rs.173.7bn during 1994-95 compared with an increase of 11.6% in the preceding year. However, its share in the gross fixed investment declined from 53.5% in 1993-94to 52.8% during 1994-95. It declined from 9.6% of GDP in 1993-94 to 9.3during 1994-95. Public sector fixed investment during 1994-95 increased at a faster rate of 18.8% to reach Rs.155bn as compared with the rise of 7.1% during 1993-94.


Real investment grew by 2.8% during 1994-95 compared with a decline of 0.9% in the preceding year. Real investment in Electricity and Gas sector, which accounted for 19.7% of real gross fixed investment, grew by 29.6% compared with an increase of 4.6%in the preceding year. Real investment in Mining and Quarrying sector increased by 40.1%during the year compared the increase of 28.1% last year. However, more Important sectors like Agriculture, Large Scale Manufacturing and transport and communication, which constituted more than one third of real gross fixed investment, showed declining trend during 1994-95.


Investment activity was revived considerably during 1995-96 with an increase of 11.6% in real fixed investment compared with the smaller increase of 2.9% in 1994-95 and a decline of 0.9% in 1993-94. Two important sectors, which recorded large increases in real investment, were Large-scale manufacturing and electricity and gas. Real investment in large scale manufacturing, which accounted for 18.1%of real fixed investment in 1995-96, grew by 35.6% against the decline of 3.2%in 1994-95. Real investment in electricity and gas sector, with a share of 20.2% in real gross fixed investment grew by 24% in 1995-96 compared with an increase of 19.5% in the preceding year. Real investment in Agriculture increased by 1.3% compared with an increase of 10% in 1994-95. Real investment in mining and quarrying, and wholesale and retail trade increased by 33.2% and9.4% respectively. Real investment in construction, however, declined by 8.6%.


Gross fixed investment at current prices rose by 21.5% to 390bn during 1995-96 compared with an increase of 14.2% in the preceding year. The ratio of gross fixed investment GNP at market prices rose from 17.1% in 1994-95 to 17.8% during 1995-96. Private fixed investment at current prices showed a growth of 29.4% to Rs.214.6bn 1995-96 compared with an increase on only 10.3% in the preceding year.


Its share in gross fixed investment rose from 51.7% in 1994-95 to 55% during 1995-96. It rose from 8.9% of GDP in 1994-95during 1995-96. Public sector fixed investment rose by 13.1%during 1995-96 to reach Rs.175.4bn compared to an increase of 18.8% a year earlier.


Real gross investment rose by 2.3 per cent during 1997-98 against a decline of 7.5 per cent last year. Important sectors, which contributed to the growth, were agriculture, large-scale manufacturing, construction, whole sale and retail trade and general government. Real investment in agriculture rose by 19 per cent in 1997-98 compared with the decline of 33.2 peer cent in 1996-97. Real investment in large-scale manufacturing rose by 7.5 percent during 1997-98 against the decline of 1.4 percent last year. Real investment in construction, wholesale and retail trade and general government roe by 9.2 percent, 19.1 percent, 18.8 percent and 24.4 percent last year.

Gross fixed investment in nominal terms, rose by 6.5 percent to Rs. 405 bn during 19970–98 compared with 3 percent in the preceding year. The ratio of the gross fixed investment to GNP declined from 15.9 percent in 1996-97 to 14.8 percent in 1997-98. Private fixed investment rose by 13.9 percent to Rs. 243.9 bn during 1997-98 compared with the increase of 10.6 percent last year. Its share in the gross fixed investment rose from 56.3 percent to 60.2 percent in 1997-98. As the percentage of GNP, it remains 8.9 percent during 1997-98. Public Sector fixed investment declined by 3 percent during 1997-98 to reach at Rs. 161.1 bn compared to the fall of 5.3 percent last year. As a result, its share in GNP fell from 7 percent to 5.9 percent. Several factors contributed to setback to the investment in the economy. These include the lack of confidence of the investors due to the political uncertainty, erosion of rupee value due to successive devaluation/downward adjustments in rupee dollar parity, shrinking public sector and law and order situation.


YEARS 92-93 93-94 94-95 95-96 96-97 97-98
Gross Total Investment 277744 305477 346508 403417 418549 476424



The gross domestic product of a country quantifies the total output of the country in monetary terms. Pakistan’s GDP has been growing at a steady rate over the last decade ranging between 3 percent and 6.5 percent. The effect of this increase in the GDP is nullified on the economy because of the continuous and phenomenal increase in the population of Pakistan. Pakistan’s current population growth rate is 2.6%that is one of the highest in the world. This puts burden on the scarce resources of the country. So the GDP has to grow at a rate that should be able to provide a sustained thrust to the economic and social development of the country.


The GDP grew by 3.8% in 1993-94 and stood at Rs.1, 573 billion as compared to previous years when the GDP grew by 2.9% and stood at Rs.1, 341 billion.


The GDP registered an increase of 4.7% in 1994-95 in real terms as compared to the increase in GDP of 3.8% the previous year. With the population increase of 3% GDP per capita grew by 1.7 percent as compared to 0.9 percent the preceding year. The increase in the GDP can be attributed the increase in consumption by both the public as well as the private sector.


The GDP in real terms increased by 6.1% during 1995-96 compared with 4.4 % in the previous year. The increase in the GDP can be attributed to the growth in the agricultural sector. With the population increasing at the rate of 2.8 percent the real GDP per capita in real terms increased by 3.3%. A sharp decline in the workers remittance resulted in decrease in the net factor from abroad.  The increase in the GDP can be attributed to the increased in the consumption both by the government as well as the private sector.


The GDP showed a continued upward trend in the year 1996-97 and registered a GDP of Rs. 2,404 billion as compared to 1995-96 when the GDP stood at Rs. 2,165 billion.


The GDP continued to grow in 1997-98 and reached to Rs. 2,759 billion as compared to 1996-97 when it reached to Rs. 2,404 billion.



YEARS 92-93 93-94 94-95 95-96 96-97 97-98
GDP 1341629 1573097 1882071 2165598 2404633 2759525



The interest rate prevailing in the economy is intimately related to the deposits. Positive rate of return on deposits is important pre- requisite for promoting financial savings in the economy besides ensuring healthy banking system. The interest rates should be high enough to compensate the depositors against the inflation rate prevailing in the economy. The government is, however, trying to strike a balance between the inflation rate in the economy and interest rate prevailing in the economy. To support the industrial activity government is taking steps to make cheap capital available to the industry. Several steps have been taken in this respect by the government to reduce the interest rate over the pasts few years. These steps include reduction of the statutory liquidity ratio, the slashing of the discount rate and the removal of excise duty on loans.


In this situation the banks are expected to increase their credit policy by adapting to an aggressive lending policy. Therefore, the expected decline in the earning is likely to be compensated by increased lending and corresponding increase in the interest income of the banks.
In Pakistan the rates of return on the PLS deposits (except until recently the deposits under current accounts) are determined by banks depending on their profitability and by applying different weights prescribed by state bank of Pakistan to different types of deposits.


A comparison of the weighted average of rate of return on the interest and PLS based deposits revealed that the overall rate of return increased in case of interest based deposits from the 5.93% in 1994 to 6.91% in December of 1995. However in case of PLS deposits the weighted average rate of return declined from 9.19% at end of December 1994 to 9.07 % at end of December 1995 indicating a negative rate of return of deposits.

The weighted rate of return on the interest based deposits decreased from 6.91% at end of 1995 to 6.0 % at end of 1996. While the rate of return on the PLS deposits increased from 9.07% at end of 1995 to 9.6% at end of 1996.


The weighted rate of return on the interest as well as PLS based deposits increased during this period, However the PLS deposits showed a slightly higher increase as compared to the interest based deposits.

The weighted rate of return on the PLS account rose from 9.6% from December 1996 to 9.9% at end of December 1997. The weighted rate of return on the interest based deposits increased from 6.0% in December 1996 to 6.1% in December of 1997.


Years 1994 1995 1996 1997
Interest based Accounts 5.93 6.91 6 6.1
PLS based deposit 9.19 9.07 9.6 9.9



A key economic variable in the economy is the price level and its rate of change. By inflation, in ordinary language we mean a general rise in prices. However, when discussing inflation, we are thinking of a persistent rise in prices rather than once-for-all rise in prices. In developing countries like Pakistan the cause of inflation is that investment is higher than savings as shown in the graph.


YEARS 92-93 93-94 94-95 95-96 96-97 97-98
Savings 182004 246205 296872 249842 268555 401386
Gross Total Investment 277744 305477 346508 403417 418549 476424


A stable level of prices is very important for economic growth and development, that is why one of the fundamental goals of the central bank and government is to achieve low and stable rates of inflation. High inflation in the absence of fully indexed nominal contracts, imposes a variety of potential costs on individuals and firms and financial institutions. For one thing greater inflation encourages the people and firms to find ways to economize on their holdings of currency and demand deposits, which entails expenditure of real resources. It also entails more  frequent price changes and associated menu costs. Individuals and firms may also be induced to change the terms of wage and other contracts much more frequently which is costly in time and effort, or to index contracts to inflation to a larger extent, which also may entail resource cost. Finally , inflation variability also may be costly, because it forces economic agents to determine whether aggregate or relative prices have changed thereby complicating consumption and production decision

The target for the inflation rate was 7% for 1994-95, which was consistent with the target of growth in real GDP of 6.9% and increase in money supply of 11.8%. However, the lower than target growth in GDP and higher than target increase in money supplied to the widening of the inflationary gap, defined as money supply growth less real GDP growth. The economy grew by 4.7%while the money supply increased by 16.6%. As a result, the inflationary gap increased to 11.9% as compared with the target of 4.9%. All of the price indices recorded higher rates of increase during 1994-95 compared with the preceding year. The consumer price index increased by 12.9%, the GDP deflator by 114.8%, Sensitive price index increased by 115.5%, and the Whole sale price index by 16.3%during the year. A review of the medium and long-term trends in inflation shows that in the last five years(1990-95), the inflation rate has been substantially higher than in the preceding five years(1980-85). Thus, during the past five years ,the average rate of inflation terms of CPI was 11.1% compared with 6.1%during 1985-90. A number of factors contributed unsustainable high rate of inflation , but expansion of monetary assets has been the most important factor. Money supply expanded at an average annual rate of 26.3%during1990-93 and also there were some deceleration in monetary growth in 1992 and 1993, it was still significantly larger than the target and added to the monetary overhang, resulting in the hardening of the inflationary expectations. The excessive monetary expansion during 1994-95 was attributed to the larger than targeted increase in public sector borrowing for budgetary support, use of the part of privatization proceeds, increase in lending by ADBP and SBFC under the government sponsored credit schemes and larger than targeted increase in net foreign assets.

The rate of inflation decelerated to 10.8%in 1995-96 from 13% in 1994-95. The SPI rose by 10.7%in 1995-96 compared with 15%in the preceding year, while WPI showed a rise of 10.3% compared with 16.3%in 1994-95. GDP deflator also recorded a lower rate of increase of 10%as compared with 13.6% in 1994-95. The deceleration is attributed to the recovery of real GDP growth to 6.1%in 1995-96 from 4.4%in 1994-95. Monetary expansion was also lower in 1995-96 as compared with the preceding year. Factors that prevented further easing of inflationary pressures in 1995-96 included excessive government borrowing , a considerable depreciation of Pak. Rupee in nominal terms, increase in administered prices, more reliance on indirect taxes etc. As a consequence, the rate of inflation of 10.8%, lower as it was compared to proceeding year, remained higher than the original target of 9.5%for 1995-96.



YEARS 92-93 93-94 94-95 95-96 96-97 97-98
INFLATION 8.7 12.9 14.2 9.6 11.4 8.9







The deposits are the most directly related economic variable to the investment in the economy. The higher the amount of deposits in the banks, the higher would be the investment in the infrastructure and valuable assets. The deposits are dependent upon the interest rates so the investment is indirectly related to the interest rates in the economy. So the investment in the economy is an indirect function of the interest in the economy.


Deposits 79544 92074 108797 117685 121900 109400
Investment 277744 305477 346508 403417 418549 476424




*From 92-93 to 97-98

The coefficient of correlation between the two variables comes to about 0.79.


The strong correlation between the deposits and the investment shows that the as the deposits increase then there is an increase in the investment in the economy. The relationship between the investment and deposits is more or less linear in nature. This is one of the desired results of the monetary policy of the government.  The deposits in the banks are converted into capital goods and this is an indication of the growth of the GDP of the company.



The near linear relationship between the two variables is a strong and do the depositors in the bank to the industry put an indicator of the channeling of the resources. This correlation is infact an indicator of the increase in the GDP of the country through the mobilization of the deposits.




Savings is the core for the development of a country. Especially for a developing country like Pakistan savings are important because the infrastructure for the growth of the country is needed. And a solid infrastructure can only be provided to a country if the country saves enough to support the formation of the infrastructure. The relationship between saving is investment is of extreme importance as it signifies the saving converted into effective product producing assets. The higher the co-relation between the savings and investment, the higher the savings converted into valuable asset producing asset. In Pakistan the coefficient of correlation between the savings and investment is 0.76 based on the following data.


Savings 182004 246205 296872 249842 268555 401386
Investment 277744 305477 346508 403417 418549 476424



The coefficient of correlation (r) between the two variables come to about 0.76.


This means that the investment is highly related to the savings done by the people in the society. The coefficient signifies that as the savings increase then the investment increases and the relationship of the corresponding increase is signified by the number of 0.76. The relationship between the saving and investment is more or less linear, meaning that more or less the for a given amount of saving there is a corresponding high amount of investment which shows a high correlation.

Savings 182004 246205 296872 249842 268555 401386
Investment 277744 305477 346508 403417 418549 476424




* Figures in millions for year 92-93 to 97-98


The savings and investment each in the period has been rising at more or less steady rate and the relationship between them is nearly linear in nature. The savings are channeled to the investment, which is the one of the prime objectives of the monetary policy of the government.


The savings have been encouraged by the government through its policies of price stability and a low and constant rate of inflation over the time period. The stable inflation rate has raised expectations in the public for a period of stability, so there is an increase in the savings by the public as they anticipate a good return on their savings.




The relationship between saving and GDP is an important indicator of the deposit creation efforts on the parts of the banking sector. As the size of the GDP increases there should be an increase in the value of the savings so as to support the growth of the growing economy. The consumption oriented Pakistani society has an inclination to spend more as they have more money, rather to save the money and invest it. The exact relationship in the Pakistan between the saving and GDP is given by the coefficient of co-relation, which comes to around


The coefficient of correlation comes to 0.832 between the two variables under observation.


Savings 182004 246205 296872 249842 268555 401386
GDP 1341629 1573097 1882071 2165598 2404633 2759525


*From 92-93 to 97-98


The strong correlation between the saving and GDP indicates that the saving has a direct and profound impact on the gross domestic product of the country. As the savings increase then there is a corresponding increase in the GDP of the country. This means that the savings are infact being deposited into the banks, Which inturn are giving the loans. These loans are being invested in the economy and as a result of which there is increase in the gross domestic product of the company.




The interest rate is a determining factor that controls the total credit available to the industry. An interest rate that creates a healthy demand for credit can spur the industrial activity in the country.

However, the nominal interest rate is directly dependent upon the inflation rate in the economy. This dependence of interest rate on the inflation has an important significance for the investment avenues. As the interest rates rise and fall with the inflation rate in the economy, therefore the fluctuation in the inflation rates causes some projects to remain profitable while renders others unprofitable.


In a country like Pakistan where there is huge government deficit, the demand for more debt puts pressure on the inflation rate pushing it up, while simultaneously putting the pressure on the interest rates. This added pressure on the interest rate causes the inflation and interest rates to increase, thus putting constraint on the money available to the business for investment purposes.


Inflation Rate 12.9 14.2 9.6 11.4
PLS Interest 9.19 9.07 9.6 9.9


The coefficient of correlation (r) between the two variables comes to -0.75.


* From 93-94 to 96-97



The relationship between the PLS profit rates and the inflation rate is not much linear in nature. This is because of the fact that the PLS Accounts are not dependent upon the inflation rate in the economy as much as the other interest based Accounts which mainly give a specified amount of return to the Account holders.



Inflation Rate 12.9 14.2 9.6 11.4
Interest on Interest based Accounts 5.93 6.91 6 6.1





* From 93-94 to 96-97


The coefficient of correlation (r) comes to about 0.68 between the two variables.

The coefficient represents a high degree of relationship between the inflation rate and the interest rate on the interest based Accounts. As the inflation rate in the economy rises then there is also a rise in the interest rate, which is not linearly related to the inflation rate, but still there is considerable relationship between the two variables.





The deposits in the banks are a reflection of the satisfaction of the depositors from the interest rate in the economy. The higher the interest rate in the economy, more deposits would deposit in the banks. The interest rate should give enough return to the depositors so that they should consider putting their money in the banks. If the rate of return on the deposits were not able to give sufficient return over and above inflation rate then the deposits would not be enough to support the development of the infrastructure in the economy.

PLS Interest 9.19 9.07 9.6 9.9
Investment 92074 108797 117686 121900


*From 93-94 to 96-97

The coefficient of correlation comes to around 0.77 between the two variables.


There is a strong relation between the returns offered by the PLS Accounts and the deposits in the banks. As the PLS Accounts are giving a high return therefore the deposits are highly correlated with the profit given by the PLS Account.

Interest on Interest based deposits 5.93 6.91 6 6.1
Investment 92074 108797 117686 121900

*From 93-94 to 96-97


The coefficient of correlation (r) between the two variables comes to around 0.068.

The correlation between the deposits and the interest on the interest-based deposits is very weak partly because of the return of these deposits. The other reason is that the major amount of the deposits are attracted by the PLS Account.


Pakistani banks are offering the depositors an interest rate ranging from 14- 16 percent in the current scenario. The current interest rate is definitely 1.5-2 percent lower then what Pakistani banks were giving nearly a year before. The current interest rate is because of the policy stated by the stated bank of Pakistan and is a part of long term strategy being implemented by the government to stabilize the economy and provide the needed thrust to put the economy again on the track.


The coefficient of correlation between the inflation and the interest rate is 0.68, Which is not high enough. This means that the interest rates have been especially kept at a level, which hasn’t high correlation with the inflation rate. The inflation rate has also been kept at a tight level to increase the perception of price stability in the market and to create confidence in the public to save, as there is price stability in the market. This will lead the public according to the expectation hypothesis to consider the inflation level to remain at the same level for quite sometime. The inflation rate has been going down in the economy consistently over the years. The inflation rate was 9.6percent in 1995-96, While in 1996-97 it came to about 11.4 percent. However, this year the inflation came down further at 8.9 percent. This gradual decrease in the inflation rate over the years has restored the confidence in the depositors to save and deposit the money in the banks.


This decrease in the interest rate despite a decrease in the return on the deposits offered by the banks has resulted in increase in the savings by the

Depositors.  Despite of the decrease in the interest rate the coefficient of correlation between the interest rates and the deposits is 0.77, Which shows a high degree of relation between the interest rate offered to the depositors and amount deposited in the banks.


The policy adopted by the banks seems to be working, as the coefficient of correlation between investment and deposits is 0.79.  This high correlation means that the intentions of the government are being fulfilled. A high investment rate is what the government desires for the revival of the economy. The present strategy of low and stable inflation rate and low return on the deposits seems to be working well for both depositors and the borrowers.

The prize bond schemes launched by the banks after the nuclear blast, however had negative impact on the deposit situation in the country. The schemes attracted large amount of money that was mostly  taken out of  the deposit account s.


In the present situation the current strategy used by the banking sector represents a cohesive strategy being used by the banking sector to increase the deposits and to start vigorous activity in the economy.



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